Fiscal political economy: why raising taxes will hurt reforms

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Society accustomed to the idea of raising taxes, but in fact such a move will only reinforce the skewed structure of public finances and, consequently, the archaic aims and methods in public administration

Almost sensational news: the experts of the Gaidar Institute-order-Kudrinsky, Centre for strategic research had prepared proposals to increase tax rates on the income of individuals under 17%. The irony is that Yegor Gaidar was the author and ideologist design low income tax with the flat rate, and this structure has played an important role in the economic and social stabilization of the 2000s.

Of course, times change, and come up then the design has long been a subject of controversy. Low income tax turns high business costs on the payroll. Here and in the proposed scheme, an increase of 4 percentage points in the income tax rate is proposed to balance the reduction in insurance premiums from 30 to 22%. Another proposal under discussion in government circles, — the increase of VAT from 18% to 21%, accompanied by a reduction in insurance premiums too, to 21%. There are other options.

In General, the fiscal issue has become almost the main subject of debate in the economic bloc of the government and in the segment of economic expertise, which was considered “liberal”. Raising the retirement age, increase income tax or increase VAT — that’s the main circle of high-profile ideas and debate — everything else is the cherry on the cake. However, the discussion step by step, teaches society to the idea that raising taxes is inevitable, you just have to choose where and how.

By hook and by crook

Fiscal Outlook of the government is evident in the polemics of the Minister of Finance Anton Siluanov and the new Minister of economic development Maxim Oreshkin (former Deputy Siluanov) at the Gaidar forum. The Finance Minister had developed the theme of raising taxes, and the head MAYOR, how would opposing him, saying that tax increases can be avoided if the out of the those who today do not pay taxes or underpaid. However, in economic terms, “whitewashing” of the economy, proposed as an alternative, it is also a fiscal measure. The cumulative withdrawal of money in favor of the state will grow as a result.

Of course, the size of the shadow economy in Russia, according to the calculation methodologies that exist today, is very high for a country with a level of GDP per capita (about 40% for the late 2000s — such as the size of the shadow economy in Uganda, Tajikistan and the Philippines). However, the size of the shadow economy is not the only Russian anomaly: the quality of institutions and the level of efficiency of state management in Russia (if you focus on the relevant indices of the world Bank) also does not correspond to the level of our development, such as is characteristic of much poorer countries. And between these two anomalies has a direct relationship.

The quality of law enforcement and regulatory quality is likely the main factor in higher than expected at this level of development, size of the informal sector. But this broader issue is beyond the scope of competences of the Minister of economic development clearly do not have at the moment, the political mandate. Therefore, the program “whitewashing” is likely to boil down to administrative pressure on business, which will make the show more broad-based and effective tax rate will increase. This method has the advantage for economic Affairs, that the moment can provide both the extension of tax revenue, and the statistical increase in GDP. While the long-term effect on economic activity and growth will be negative or zero.

The history of the problem

But back to tax innovations discussed in the expert and government circles. In the argument, which in this case is sound, it is easy to notice the trick.

On the one hand, the Minister of Finance, for example, openly said that the budget at the current level of tax exemptions to balance is impossible, but with other speakers from all more vivid tax innovations experts claim that the level of taxation will remain the same, the load will only be structurally optimized. Some of them clearly cheating. Whether you want to optimize the effects of taxation on the economy, whether to balance the budget?

If you look at the situation a little wider, then we can quite confidently assume that a tax maneuver would turn out this rising fiscal burden.

This problem, in fact, formed quite a long time, even after the 2008 crisis when the Russian budget expenditures rose sharply. Initially, the additional expenditure used to mitigate the social consequences of the crisis. However, after a recovery in economic activity and a new rise of oil prices, they are not reduced to the previous level: the Federal budget expenditures remained on average 2 p. p. higher than in the mid-2000s, and the consolidated budget by almost 5 p. p.

To expand the costs allowed, as you know, once again raised the export earnings. During this extension, the budget has paid only disappeared, despite the ultra-high oil prices, surplus. But no one specifically for this then do not pay, while the beneficiaries were many.

The political economy of “tax maneuver”

In fact, after the crisis of 2008-2009, Russia entered a new political-economic period. This period was characterized, on the one hand, a slowdown in investment activity and economic growth, and on the other a notable expansion of the public sector.

In the end, the era of the welfare budget that allowed both to expand the budget system of the order, and to raise salaries in the public sector, and to download the defense industry, has formed a new political coalition that can be called oligarchic distribution. This coalition has besides a pronounced military-police character: defence expenditure, national issues and law enforcement together comprise about 40% of the Federal budget. This same coalition, by the way, the demand for a geopolitical tension and political confrontation.

The choice facing the Kremlin after the fall in oil prices, in fact very simple: either it is sufficient sharply to reduce and redistribute the costs or find new sources of revenue in the amount of approximately 3% of GDP. This reduction and reallocation of costs will inevitably lead to the reformatting of the coalition. So you have to find ways to squeeze out of the economy the missing interest income.

Therefore, it is not consistent with the arguments of some experts and officials that, say, the Russians were “used” to high levels of social benefits and this habit dictates the need to raise taxes. As you can see, even in the 2000s the Russians have lived at a lower level of expenditure. “Used” to a new level rather the participants distribution of the coalition and based on her political group.

It is equally clear from the above that the problem cannot be resolved using the “tax maneuver”: to maintain the coalition we need real additional income. This increase in taxes, of course, also politically sensitive procedure, and because the torments of economic experts on the fiscal package of measures in a progressive wrapper is likely to continue.

The bare essence of the matter is that the increased tax burden will keep the skewed structure of public Finance, the dominance of the state and a wide network of redistribution in the economy, and therefore, archaic aims and methods in public administration and policy. Here are the main nerve of economic policy and the main fork. And if you say, we say, a little raise taxes today, and then will implement reforms and improve the business climate; believe it not. Everything is exactly the opposite: if the tax increase fails, then no reforms no one will be needed. But if we fail, then the probability of reform increases dramatically.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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